Mumbai – After one of the world’s toughest lockdowns brought the Indian economy to its knees, the country’s latest economic data shows signs of a preliminary recovery.

According to official figures released on Friday, India’s gross domestic product (GDP) declined 7.5 percent in the second quarter (July to September), an improvement from the record decline of 23.9 percent in the previous quarter. With two consecutive quarters of negative growth, India has now officially entered recession, although it is showing signs of improvement.

COVID-19 restrictions have been eased since June, allowing economic activity to resume. Manufacturing saw a particularly strong recovery with growth of 0.6 percent in the second quarter, compared with a decline of 39.3 percent in the previous quarter.

There is a risk that the growth momentum will fade once this initial surge in festive and pent-up consumption is over.

Aurodeep Nandi, Economist from Nomura India

Indian shoppers eager to hit the stores after being locked up at home have also contributed to the recovery.

September marked the start of the Indian Christmas season, when families usually buy new clothes and large items like jewelry. According to the Society of Indian Automobile Manufacturers (SIAM), car sales rose 17 percent in September compared to September last year.

But while the start of the festive season has been helpful in getting people back to spending money, it may have exacerbated the spread of the coronavirus.

COVID-19 cases have returned to critical levels in the state capital New Delhi and other major cities. The total number of infections in India exceeds 9.3 million – the second highest in the world. This has led to calls for possible localized lockdowns and new travel restrictions that analysts warn will slow the pace of the economic recovery.

“The economy is not necessarily in auto-correct mode just yet,” Aurodeep Nandi, Indian economist at the global financial services group Nomura, told Al Jazeera. “There is a risk that the growth momentum will fade once this initial surge in festive and pent-up consumption is over.”

Analysts warn that the pandemic has had an even more devastating impact on the informal sector of the Indian economy [File: Bilal Kuchay/Al Jazeera]India’s economy was already slowing before the pandemic. A persistent banking crisis and inadequate economic measures had slowed growth. India, once the fastest growing economy in the world, slowed to 4.2 percent in 2019-20 – its lowest level in 10 years.

“Right now we’re in the ‘after-glow’ phase as we step out of the pandemic crisis and see things normalize – but we’re feeling the impact of a fall in government spending on growth,” Nandi said.

A mixed recovery

Although jobs are slowly returning, incomes are no longer where they were. While employment rates almost returned to pre-COVID levels in July, nearly half of households surveyed by the Center for Monitoring the Indian Economy (CMIE) in October said their incomes were lower than a year ago.

This is because many of the jobs regained were in subsistence farming, which is actually “disguised unemployment,” Mahesh Vyas, CEO of CMIE, told Al Jazeera.

“Essentially, a lot of people who say they work deserve nothing,” he said.

While the second quarter data looks promising, let’s not be misled into saying that the recovery process has begun – the third quarter is slowly looking challenging.

Mahesh Vyas, Center for Monitoring the Indian Economy

High-quality, higher-paying jobs that were removed from the formal sector have also not returned in an appropriate manner, Vyas added. This weighs on overall incomes and weakens consumer power – a significant disadvantage for a consumer-driven economy.

“We saw a recovery until around August or September, but after that there was stagnation,” said Vyas. “While the second quarter data looks promising, let’s not be misled into saying that the recovery process has begun – the third quarter is starting to look challenging.”

A significant increase in corporate earnings is also viewed with caution.

A November report by the Central Bank of India showed net income for non-financial corporations increased 35 percent. However, analysts warn that this is due to cost reductions rather than strong demand.

A revival in COVID-19 cases threatens public health and economic recovery in India [File: Adnan Abidi/Reuters]”Among other things, companies are reducing their labor costs,” Uday Tharar, an economist for emerging markets at investment firm GMO, told Al Jazeera. “That means the recovery we saw in August and September does not translate into any benefit for employees.”

If this continues, Tharar warns, it could damage companies in the long term and reduce demand for their own products and services.

And while businesses may be doing well right now, those in the informal sector and micro, small and medium-sized enterprises (MSMEs) – a sector that is India’s second largest employer and main driver of growth – are struggling.

Smaller businesses have found it harder to get back on their feet without the infrastructure to work from home and the financial reserves to weather the shock of the lockdowns.

Analysts also warn that since GDP numbers are calculated using largely formal sector data, they may not adequately capture the pain of the informal sector.

“We could underestimate the extent of the damage that is happening there,” said Vyas.

Restrained spending, reform-induced recovery

Unlike other economies in developed and emerging countries, India has not implemented a comprehensive money transfer program to support people who have lost their jobs or whose savings have been wiped out by the coronavirus crisis.

A tense balance sheet, which was a concern even before the pandemic, meant the government was “fiscally conservative” in response to the COVID crisis, Tharar said.

“India has already stepped into COVID with 68 percent of GDP in national debt,” he said. “As this is expected to increase and revenues will decrease, New Delhi believes that public spending needs to be cut.”

A growing budget deficit is also worrying as it has a negative impact on India’s creditworthiness.

The government has been criticized by some analysts for its tepid fiscal response to the crisis, which is estimated at around 1 percent of GDP, rather than the 10 percent of GDP package announced by Indian Prime Minister Narendra Modi.

After an initial spike in spending at the start of the pandemic, government spending was 15 percent lower than last year through August, CMIE noted.

However, other analysts agree on the need to limit borrowing to maintain India’s credit rating, which was downgraded to above junk during the pandemic.

“The government has done as much as it could with its limited tax space,” said Nandi.

As the Christmas season begins, health officials fear celebrations could lead to more COVID-19 infections [File: Sumit Dayal/Bloomberg]He also pointed to reforms being launched in agriculture and manufacturing, as well as improvements to Indian labor laws as the government seeks to stimulate the economy and create jobs.

“These are really significant and have been needed for a long time,” said Nandi, adding that while the success of the policy depends on how well it is implemented, “these are not politically simple reforms.”

In the coming months, India’s recovery will largely depend on how it reacts to a second wave of coronavirus infections – and how quickly it can distribute a vaccine.

“As more people get vaccinated, parts of the economy that haven’t recovered will revive,” said Nandi. “But in a country like India it won’t be easy or quick. Until recovery, it will rely on easy credit terms and hopes for stronger global growth. “

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